Safeguarding U.S. wages not 'insult'

Dartmouth economics professor Douglas Irwin joined the never-ending, undeserved assault on the Smoot-Hawley tariff in his June 18 Wall Street Journal opinion column titled “How ‘Protectionist’ Became an Insult.”

He claims that when President Herbert Hoover signed the infamous Smoot-Hawley tariff on June 17, 1930, to which he refers as “a Republican ploy to gain the farm vote in the 1928 election,” it significantly raised the “duties on imported goods” and “contributed to a collapse in world trade and the spread of protectionism around the globe.”

Irwin also lectures free-trade skeptics by warning us “that any protectionist move by the U.S. will be counterproductive if it leads to foreign retaliation,” which essentially means we should be content with an unrestrained, trade-deficit-escalating, job-killing, national-revenue-destroying, independence-eliminating, GDP-reducing flood of imports as any defense mechanism to stop them is a futile and perpetually losing proposition. I wonder why none of the countless countries across the globe that have run longtime trade surpluses with the U.S. ever seems to think it can be counterproductive when they slap high tariffs on our exports.

At least Mr. Irwin is willing to admit most economists don’t claim the Smoot-Hawley tariff was responsible for the Great Depression, which is merely an exercise of stating the obvious since it was enacted more than eight months after the October 1929 stock-market collapse.

Rather than dissect Mr. Irwin’s flawed logic point by point, however, I’ll provide my own compelling case, complete with historical facts, as to why the Smoot-Hawley tariff did not contribute to a sharp decline in world trade back in the 1930s.

Campaigning against Herbert Hoover for the presidency in 1932, Franklin D. Roosevelt saw the tariff as a way to get a leg up on his Republican opponent’s incumbent bid. Even the Democrat party platform of 1928 proclaimed that tariffs were necessary to sustain “legitimate business and a high standard of wages for American labor.” The platform also encouraged the equalization of the cost between production at home and abroad to “safeguard … the wage of the American laborer.”

The confidence Hoover expressed in high tariffs in his re-election bid was echoed throughout the campaign. If the word of the day was that high tariffs had caused the Great Depression, Hoover’s stance would have obvious political suicide. Even FDR was unable to totally shake the call for high tariffs. On the campaign trail in October 1932, he proclaimed, “I favor continued protection for American agriculture as well as American industry.”

Regardless of how one calculates tariff rates, either as a percentage of imports where tariffs are applied or as a percentage of all imports, duty-free or not, the Smoot-Hawley tariff did not have the highest rates in U.S. history. That claim belongs to the Tariff of Abominations of 1828, which caused neither a depression nor a recession. With the belief that high tariffs cause depressions and hamper economic growth, one has to wonder why there wasn’t a Great Depression of the 1830s.

In their attempts to vilify Sen. Smoot and Rep. Hawley for proposing such extremely high tariff rates, many politicians, economists and textbook writers seem to miss the fact that the 59.1-percent tariff rate (up from 44.6 percent) only applied to one-third of all imports in 1932. The 59.1-percent rate is derived by using the most liberal method for calculating tariff percentages, and is actually higher than it should be. The reason the tariff was determined to be at such a falsely high level is that more than 50 percent of imports had tariffs applied at a fixed rate.

For example, if a particular good had a tariff rate of 25 cents per pound, and the product sold for a dollar, the tariff percentage was represented at 25 percent. However, with the prices falling for goods as the economy collapsed, the tariff rate would double if the value of the good were reduced by one-half. So what was a 25-percent tariff rate before the Depression instantly became a 50-percent tariff, although the consumer was actually getting the same product for cheaper at the newly calculated higher tariff rate. In other words, a product that cost a dollar at a 25-percent tariff would cost $1.25, but, if the price fell to 50 cents, the tariff was still 25 cents and the product now only cost 75 cents, but the tariff rate was now calculated to be 50 percent.

The Smoot-Hawley tariff did raise duties on particular import-sensitive goods, such as Canadian agriculture, that were already on the tariff list, but also increased the amount of goods to which no tariffs were applied compared to the Fordney-McCumber tariff of 1922.

Few will mention or acknowledge that President Hoover raised the top income-tax rate from 25 percent to 65 percent in 1932, and FDR continued this atrocious policy by further raising the rate to 79 percent. This insurmountable climb in the income-tax rate inflicted far more damage on the American consumer than any modest tariff increase on a select amount of import-sensitive items. Keep in mind that tariffs are a discretionary, indirect tax. The consumer can choose to buy the import or the domestic good, and therefore refuse to pay the tariff. No consumer escapes direct income taxes. Everyone must pay.

America certainly was not the only nation to raise tariff rates before the Depression, as many nations raised tariffs after World War I. France, Germany, Spain, Italy, Yugoslavia, Hungary, Czechoslovakia, Bulgaria, Romania, Belgium and Holland all raised their tariffs on imports to levels comparable to those before World War I. Even Britain, a free-trade nation, declared that “new industries since 1915 would need careful nurturing and protection if foreign competition were not again to reduce Britain to a technological colony.” The message was clear. Nations were rebuilding their industries after World War I and needed protection to redevelop them.

But what effect did the tariff have? History shows that the crash was much more likely to affect the stock market due to the inability of Congress to pass a tariff bill at all than because of the possibility that Congress might pass a high tariff bill. A business community and its nation perceived a lack of leadership, gridlock and political maneuvering, rather than tending to the needs of the country. Records show that when Rep. Hawley’s bill passed the House five months before the stock market crashed, the Dow climbed over 5 points to 298.87.

After Sen. Smoot proposed an even more protectionist Senate version, the market peaked at 381 points. However, Idaho Republican Sen. William Borah formed a coalition of constituents to defeat the bill. On October 3, the Dow lost 15 points. The front page of The New York Times stated: “Hoover Defeated on Flexible Tariff; Coalition in Senate, 47 to 42, Takes From President Duty-Fixing Power.” Although Hoover sustained veto power, the perception was that he had no majority in Congress to pass the tariff bill. Democratic Sen. George Norris tacked on an agricultural-subsidies program, and Sen. William Borah and his coalition of agrarian Republicans took charge of writing the tariff.

Prior to the crash, the National Association of Manufacturers complained to President Hoover of the inability of business to make decisions of industrial expansion, since the tariff bill had been haggled over for five months. The Bankers Trust director and former vice president, Fred Kent, blamed the Democratic coalition, led by Sen. George Norris, for their part in the stock-market crash. “Industry cannot proceed, employ men, buy and process raw materials unless it can feel confident of markets,” said Kent. “There was a fear that if this [insurgent] bloc succeeded in rewriting the tariff bill in its own way, it might come to believe that it had the power to reduce tariffs.” William Borah responded that if the fight of his coalition “shakes the Stock Exchange to the earth, let it go.”

The volume of trade in respect to imports did drop off in 1930 after the passage of the Smoot-Hawley tariff, but what nation would not see a reduction in imports if the buying power of their citizens had just been cut in half or worse? One would think that out of the total volume of U.S. imports, during the deep Depression years, import growth of non-dutiable goods would outpace those upon which duties were levied. However, this is not the case.

From 1929 to 1931, the volume of both dutiable and non-dutiable imports declined almost equally at 52 percent. In fact, there were one hundred products that had higher tariffs applied to them that actually saw an increase in import volume. It is very interesting that despite the reduced buying power of Americans coupled with the fact higher import duties were being collected on some of these items, it did not eliminate the attempt by foreign producers to gain a greater share of the U.S. market. It is obvious that not only with the Smoot-Hawley tariff, but also with the preceding Fordney-McCumber Act of 1922, and basically since the first tariff in 1789, there was no decisive negative relationship between higher tariffs and import volumes.

Concerning Dartmouth professor Douglas Irwin’s charge that nations enacted retaliatory tariffs against the United States for passing the Smoot-Hawley bill, historical documents do not support this view. Great Britain did not release any formal protests since it regarded the United States as a sovereign nation that did not look favorably upon other nations meddling in their affairs. Great Britain also was concerned that a formal protest might encourage still higher tariffs, which might work to the disadvantage of their exporters. Great Britain was one of America’s leading trading partners, and avoided any formal protest. Sir Esme Howard, the British ambassador to Washington at the time, informed London that “official representations … against the proposed tariff increases … [would be] a mistake.”

Foreign diplomats generally avoided specific threats of retaliation against the United States since any such language would be considered an infringement upon national sovereignty, and it was not the place of foreign governments to protest the constitutionally enacted laws of the United States. Furthermore, the word “protest” during the time of the Great Depression did not automatically express dissatisfaction with U.S. trade policy. The word “protest” usually represented the argument that treaty rights of a foreign nation had been violated.

Historical records show that the Smoot-Hawley tariff did little to encourage foreign countries to retaliate with high tariffs of their own. In May 1931, the State Department report found that “by far the largest number of countries do not discriminate against the commerce of the United States in any way.” Data from the U.S. Commerce Department show that the reason for the severe drop in exports in almost every American export industry was economic problems related to the depression, not foreign retaliation for higher U.S. tariffs.

Some U.S. exports actually saw significant gains in foreign market share. Exports of apples, pears and grapefruits increased. Exports of prunes went up 31 percent, and exports of dried apricots soared higher by 72 percent. Exports of raw materials such as cotton and rayon held steady. Exports of American films increased 49 percent, and exports of false teeth rose 24 percent.

Irwin’s assertion that the Smoot-Hawley tariff contributed to a collapse in world trade and the spread of protectionism around the globe is a myth based on ignorance of historical facts in favor of pursuing economic textbook theory. In this case, only America blames America.

Republican Sen. John Heinz III, who died tragically in a plane crash in 1991, had this to say about the Smoot-Hawley myth in 1985:

“It gravely concerns me that every time someone in this administration or the Congress gives a speech about a more aggressive trade policy, or the need to confront our trading partners with their subsidies, barriers to imports and other unfair practices, others in Congress immediately react with speeches on the return of the Smoot-Hawley Tariff Act of 1930, and the dark days of blatant protectionism and depression. It seems that for many of us that Smoot-Hawley has become a code word for protectionism and, in turn, a code word for the Depression. The changes supposedly wrought by this single bill in 1930 appear fantastic.”

Further analysis of the economy during the Depression years reveals that nearly two-thirds of the drop in imports between 1929 and 1933 occurred prior to the Smoot-Hawley tariff.

Back on July 12, 2001, I wrote the following, which was published in the second edition of “How Americans Can Buy American,” comparing our current situation to that of the 1930s: “We are on another unsustainable path now as we were then, but we have refused to learn from history. However, this time, when it becomes obvious that the path we are on is unsustainable, America will not be able to blame a policy of domestic protection.”

U.S. trade history and the situation we find ourselves in today with adherence to free trade continue to prove that for the United States, protectionism equals prosperity and free trade equals failure.